Start of a Santa Rally in Stocks?

By Alen Mattich

Associated Press

Is the Santa stocks rally getting into its swing?

Equity markets, led by the U.S., tend to see a traditional seasonal pop in the run up to the Christmas holidays. After its November dip, it seems the U.S. market has returned to its upward march. And to judge by history, it’ll keep going through the rest of the year and, broadly, through the spring.

But how good a guide is history?

To begin with, the Christmas rally tends to be part of a longer calendar-driven annual cycle. Buying at Halloween and selling in May. In 108 stock markets over the whole history of their performance, the winter, which is to say November through April, has generated 4.52% higher returns than the six summer months of the year. Over the past 50 years that outperformance has strengthened to 6.25%, according to research by Ben Jacobsen and Cherry Yi Zhang of New Zealand’s Massey University (credit to Chris Dillow, an economist at the Investors Chronicle, for digging the paper up).

“A sell-in-May trading strategy beats the market more than 80% of the time over five-year horizons,” they wrote.

Why? Various reasons related to seasonal optimism, cognitive biases or seasonal volatility of underlying economic performance are given, but none seems terribly convincing. What is clear, though, is that the phenomenon exists.

This year, there’s the additional factor that November and December tend to be good months for equities in U.S. Presidential years. The average increase in the Dow Jones Industrial Average in the November and December of an election year since 1900 is 0.83%, as against an average of 0.48% in any other month during the past 112 years.

This factoid, though, ought to be taken with a grain of salt. The trend isn’t particularly statistically robust.

Finally, there’s the matter of a recent positive flow of news. After the autumn’s worries about China’s slowdown and that the U.S. economy might be slipping into reverse, not to mention further wobbles over the euro, there’s been a flow of decent if not particularly bullish data.

That’s not to say this is a one-way bet. U.S. equities are overvalued by as much as 50% on cyclically-adjusted earnings and replacement-cost metrics. Fiscal policy will be tightened, which will eat into corporate profits. And there’s not a lot of risk being priced into the major markets right now, so a small stumble could result in big losses.

But if historic trends remain true, then the rest of the year at least will be good for shareholders.

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